Current account deficit narrows by $576m in July

Thursday, August 20, 2009

KARACHI - Pakistan s current account deficit has contracted by Rs576 million to Rs606 million during the first month of current fiscal year 2009-10. However, current account deficit amounted to $1.1 billion in the same month of last financial year. In percentage the YoY growth in current account deficit has sharply declined by 48.7 per cent during the single month of July, 2009 on the backdrop of considerable fall in trade deficit and a meager improvement in external inflows (current transfers), particularly remittances during the period under review. In the month of July, current account balance without off transfers stood at $609 million as against $1.22 billion recorded in the same month of last financial year. Consequently, entire stock of foreign exchange reserve showed a sign of stability as only SBP gross reserves amounted to $9.5 billion (excluding reserves of commercial banks) during July F10. The statistics on balance of payments position compiled by SBP for the month ended on July 31, 2009 revealed that total goods exports slashed to $1.5 billion during July from $1.9 billion of the corresponding month of previous year while imports declined to $2.7 billion from $3.4 billion registered in the FY09. Trade balance decreased to $1.2 billion in July 2009 as against $1.3 billion of last fiscal.

Balance of goods and services reached the level of $1.5 billion during the reviewed month as compared to $1.8 billion of FY09. Trade deficit significantly dropped to 1.150 billion dollars during the first month of current financial year. The YoY growth in a trade deficit had squeezed by 31.9 per cent during the single month of July 2009. Pakistan s total exports amounted to $1.488 billion in the month of July of ongoing fiscal year from $1.879 during the corresponding month of last year whereas imports stood at $ 2.639 billion as against $1.879 of previous year. Income account deficit decelerated to $46 million in July FY10 from $65 million of the same month of previous year. Unlike the previous year, current transfers up to $1.17 billion during analytical month of ongoing financial year. Capital account had down to $1 million during July as against $3m witnessed in the equivalent period of FY10. Financial account slashed to $50.10 billion during reviewed period as against $81.35b of preceding year. This decline was a result of confluence of factors such as weakening economic fundamentals, deteriorating law and order situation, slack functioning of stock market, lack of privatisation proceeds and in the presence of global financial crisis, the foreign investors shied away from investing as expectations of the lower degree of profitability and host of risks and uncertainties. Worsening law and order situation, below-than-anticipated performance of stock market and risk averse behavior of foreign investors hampered capital and financial flows to Pakistan whereby the net inflow of foreign investment declined to $2 million.

In line with the trend in emerging economies stock markets, investors are taking their investment out from Pakistan s equity market which contributed portfolio investment to decline to $3 million during July-FY09. State Bank predicts the external current account deficit may come under 5.0 percent of GDP in FY10. Provided projected foreign inflows are realised SBP s foreign exchange reserves could improve further to over $12 billion in this fiscal year. The central bank further believes exports may improve slightly if global recovery sets in by the beginning of 2010, as many anticipate. Similarly, imports could pick up also assuming domestic economic recovery. Nevertheless, both are still expected to see a fall from fiscal year 09. SBP also said there has been considerable improvement here in the course of the year. Meanwhile, foreign trade experts have indicated a further reduction in the current account deficit in the months to come. Vulnerabilities remain, however, given that our exports and markets are highly concentrated, and slow recovery in those markets will restrain exports. Imports remain vulnerable to price pressures from any rises in oil, commodity and basic raw material prices. Deterioration in the current account will directly affect the foreign exchange reserves position.